VA loans: What to know about funding fees and closing costs

Coming up with a down payment for a new home is often the thing that keeps people from taking the leap from renter to homeowner in the first place. That's why US veterans, active-duty service members, National Guard and reservists who may not have saved up enough for a down payment look to VA loans to help make homeownership a reality.

VA loans allow for 100% financing of a property, meaning no down payment is required for eligible applicants. And because a VA loan comes with a 25% lender guarantee, PMI (private mortgage insurance) is not required either. 

All of this saves you money over the life of your mortgage, but there are some out of pocket expenses that come with a VA loan, including typical mortgage closing costs and a VA funding fee.

 

VA funding fees

Many homeowners who have purchased a home through this program — backed by the US Department of Veterans Affairs — will tell you that the benefits of the VA loan program far outweigh the applicable (and unavoidable) funding fees that come with it. These fees were recently updated, so this is an excellent time to review what kind of fees you might need to consider.

Let's say that you're looking to buy a $200,000 house and you're eligible to buy that home with a VA loan. VA loans require no down payment from the borrower, however, if you're a first-time user of the VA-backed loan program and you are going the route of putting no money down, you will be charged a funding fee of 2.3% of the total loan amount, or $4,600. If you're able to make a down payment of $10,000 (5% of the $200,000 loan), you'd pay a VA funding fee of 1.65% of the $190,000 you'd still need to borrow, which would equal $3,135. 

This chart will help you understand how much of a VA funding fee you'd take on depending on your circumstances. Remember, the funding fee applies only to the loan amount, not the home's purchase price.

If this is your first use of the VA loan program: 

And your down payment is…	Your VA funding fee will be…
Less than 5%	2.30%
5% or more	1.65%
10% or more	1.40%

If you're using the VA loan program a second (or third or fourth…) time:

And your down payment is…	Your VA funding fee will be…
Less than 5%	3.60%
5% or more	1.65%
10% or more	1.40%

 

Federal law requires VA loan funding fees, but, as with any rule, there are exceptions. While anyone purchasing a home through a VA loan is required to pay the funding fees, the following are exempt:

• • Homebuyers who receive VA disability payments for military service-related injuries
  • Homebuyers who would receive VA disability payments if they weren't receiving retirement pay
  • Homebuyers entitled to receive compensation, but who are not presently in receipt because they on active duty
  • Homebuyers who are serving on active duty that provide evidence of having been awarded the purple heart
  • The surviving spouses of military personnel who died while in service, or of veterans who died due to service-related disabilities and who is receiving Dependency and Indemnity Compensation (DIC)

 

VA loan closing costs 

While closing costs are generally minimal with a VA loan, homebuyers may want to budget for these as well. Unlike funding fees, closing costs can not be rolled into the loan amount.

The following fees may apply to your VA loan application:

• • Charges to pull credit reports and credit scores
  • Costs to do a property title search 
  • Determination of whether the home requires flood insurance
  • Taxes and assessments based on federal, state and local laws

 

Additional fees the VA allows an applicant to pay

The VA regulates which fees VA loan applicants can be charged. These smaller expenses are often included in a lump-sum lender fee: typically about 1% of the total loan amount. The following fees may apply to your VA loan application:

• • VA loan application fees
  • Document preparation fees
  • Mortgage prep and/or assignment fees
  • Notary public fees
  • Postage

 

Fees the VA does not allow an applicant to pay

While some are common with conventional mortgages, the Department of Veterans Affairs does not let the following fees to be charged to a VA loan applicant:

• • Lender attorney fees
  • Real estate commissions
  • Broker fees or compensation
  • Transaction Coordinator (TC) expenses
  • Termite inspection fees (in most states)

 

Can sellers pay VA closing costs?

This is a great example of how VA loans can help homebuyers save money. Because buyers using the VA loan are restricted in what they can and cannot pay when it comes to closing costs and other fees, it is common for sellers to cover some of these costs. That's right: often, the seller pays!

Sellers aren't required to pay a borrower's closing costs, but it's commonly negotiated. Veterans Affairs allows property sellers to pay a percentage of the purchase price toward the buyer's closing costs, often around 4%. But seller concessions can also go higher if they contribute to pre-paid fees, paying points, etc. Compare that to conventional mortgages, which can cap seller contributions toward closing costs at 3%.

 

Is a VA loan right for you?

If you're a US veteran, active-duty service member, a reservist or a member of the National Guard and you're looking to buy, refinance a VA loan or want to learn more about VA homeownership benefits, reach out to us today. 

 

Movement Mortgage can answer your questions about eligibility and help you make the right decision regarding a VA loan. Find a loan officer in your area to get started or apply online.